On the 24th anniversary of the stock market crash dubbed Black Monday, stocks were down to a much less degree today. On 10/19/87, the Dow fell 508 points and 22.6%. That would be comparable to an astonishing 2,600 point drop in this present market!
Apple reported slightly less in sales and profits than Wall Street had forecasted -- for the first time in 30 quarters. This caused the stock to fall over 5%.
From Hunting Permits to Ads on Trucks, U.S. Pushes for New Business Model for the Post Office.
Here are the top financial stories of the day:
1) Could you stomach a 2,600 point drop in the Dow? From MarketWatch
Anyone younger than their mid-40s probably doesn’t remember what happened 24 years ago today, since they were not yet out of college. This includes most mutual fund managers, by the way. But they should nevertheless study what happened on October 19, 1987 — a day that came to be known as Black Monday.
The Dow Jones Industrial Average INDU that day dropped 508 points, which at first blush might not seem all that noteworthy. After all, the Dow on a couple of occasions in recent months dropped at least that much.
But the Dow was a lot lower in 1987, which meant that the 508-point drop that day was far bigger in percentage terms—22.6%, in fact.
If a similarly-sized plunge were to occur at today’s lofty levels, the Dow would drop more than 2,600 points.
Such an extraordinary plunge may strike you as most unlikely, and you’d be right. But we’re kidding ourselves if we think that another drop of that magnitude won’t happen again.
In fact, according to a fascinating body of research (championed in large part by Xavier Gabaix, a finance professor at New York University) plunges as big as 1987’s Black Monday—while rare—are an inherent part of the investment landscape.
Gabaix discovered that the frequency with which huge plunges occur follows a well-known tendency known as Zipf’s Law. A crash like 1987’s, for example, will occur once very 75 years or so, on average.
Because this is an average frequency over many years, Zipf’s Law doesn’t tell us when the next crash will occur. But it does mean that we need to arrange our financial affairs on the assumption that another one, some day, will take place.
U.S. stocks dropped Wednesday 10/19/11, piling up losses in the final hours of trading, on conflicting signs from Europe about a potentially bigger plan to stave off a messy sovereign default; disappointing earnings from heavyweight Apple, Inc. /quotes/zigman/68270/quotes/nls/aapl AAPL -0.01% and some signs of continued strain on the economy from the Federal Reserve's Beige Book report.
The Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -0.63% fell 72.43 points, or 0.6%, to 11,504.62, led by more than 3% drops in Alcoa Inc. /quotes/zigman/246295/quotes/nls/aa AA -0.10% and Bank of America Corp. /quotes/zigman/190927/quotes/nls/bac BAC +0.16% shares.
The S&P 500 /quotes/zigman/3870025 SPX -1.26% fell 15.5 points, or 1.3%, to 1,209.88, led by a pullback in natural-resource stocks. The Nasdaq Composite /quotes/zigman/123127 COMP -2.01% lost 53.4 points, or 2%, to 2,604.04.
2) Apple 'Disappoints'? Blame Wall Street-From Smart Money
Normally, a 54% profit jump would be impressive even for a promising start-up in a booming economy. On Tuesday, America's largest firm reported such a feat -- even though its posh gadgets fetch high prices and consumer sentiment is broadly drooping.
Investors were far from satisfied, however. Apple (AAPL: 398.62, -23.62, -5.59%) reported a whisker less in sales and profits than Wall Street had forecasted -- for the first time in 30 quarters. Just the quarter before, it had topped earnings forecasts by 34%.
The stock plunged following the report in after-hours trading.
That's the trouble with a popular stock. As SmartMoney.com noted earlier Tuesday, Apple looked poised for a dip, bathed as it has been in excess popularity. Fully 93% of analysts who cover it recommend a purchase of shares. Just one analyst, Colin Gillis of BGC Financial, lowered his recommendation on the stock to "hold" before the earnings report, citing the possibility of iPhone sales disappointing.
They did. Apple sold 17.1 million units, well shy of forecasts for 20 million.
That's not a sign of waning demand, for two reasons. First, it's a 21% increase from a year earlier.
Second, this year's September-quarter customers might have held off on iPhone purchases in anticipation of new model launch in October. Last year, Apple launched a new model in June, giving September-quarter customers ample reason to buy.
That's a timing quirk more than a disappointment. And if iPhone sales fell short in this year's September quarter they might top expectations in the December one.
Apple remains in excellent shape. Sales and profits are growing quickly and, as the company is quick to point out in presentations, its market share for phones and computers is low, suggesting there are plenty of customers to be won. Shares are now a bit more affordable and the company is stuffed with cash.
But prospective buyers of the stock shouldn't rush. Analysts are sure to revisit their remaining forecasts in coming weeks and a few might even issue downgrades. Fickle momentum traders might find love elsewhere for a while. There will be angst over whether the new management team is up to its task. Any of these might send the stock price lower.
Apple's Tuesday "disappointment" was mostly a matter of Wall Street disappointing investors and investors disappointing themselves. Once expectations are reigned in, what will be left is a fine company at a fair price.
3) Post Office Wants More Than Mail-From The Wall Street Journal
Will the U.S. Postal Service start issuing driver's licenses and deer-hunting permits? Selling country-music CDs? How about strapping weather or air-quality monitors on mail trucks?
Plummeting demand for traditional mail delivery, which funds the postal service, has created a looming fiscal crisis that has Congress, postal employees and government officials weighing a venture into non-mail business as a way to stay afloat. It's a divisive issue on Capitol Hill, where lawmakers are sparring over whether and how far the post office should be allowed to venture into the private sector.
On Tuesday, the Postal Service said it would increase the cost of mailing a letter by one cent to 45 cents staring in January. Earlier in the week, the 280,000-member National Letter Carriers Association hired advisers from Wall Street to help find ways to make it viable.
For more than 200 years, the agency has been almost singularly focused on delivering mail to everyone, everywhere.
No longer will that alone sustain the nation's mail delivery system, Postmaster General Patrick Donahoe recently told Congress.
He said the postal service faces mounting annual losses which could reach $16 billion by 2016 unless Congress passes legislation allowing the agency to slash its network and work force, reduce the amount it is required to set aside for retiree health benefits, drop Saturday delivery and have more freedom to offer products and services beyond mailing letters and packages.
Labor is the agency's biggest cost, so cuts there will provide the most immediate relief, says Mr. Donahoe.
But with mail expected to continue to drop, the agency can't "focus on cost cutting alone" and must also raise revenues for its long-term survival, according to an Oct. 6 report by the U.S. Postal Service Office of Inspector General.
The agency can either start outsourcing functions, like stamp sales and package handling, to private businesses, or it can find new ventures to bring into the fold, Phillip Herr, director of physical infrastructure for the Government Accountability Office said. "You can think of moving stuff into the post office, or start moving it someplace else—you're at a fork in the road," he said.
Most foreign post offices, anticipating the decline in first-class mail, long ago diversified, offering everything from banking to fingerprinting, to the sale of jewelry, candy, and children's books. Not all ventures have panned out, but many of these posts are now profitable even as traditional mail declines.
The inspector general's report suggested, for instance, that the U.S. postal service could get more into the logistics business, helping big commercial retailers navigate customs in cross-border business.
A number of U.S. legislators support the notion of moving beyond just mail. Several proposed bills would allow the postal service to offer retail products and services, such as check-cashing and the leasing of extra space in postal facilities and mail trucks to the private sector. A proposal by President
Obama would allow the agency to "offer non-postal products and increase collaboration with state and local governments."
And employees are getting involved: the National Letter Carriers Association has hired Ron Bloom, former White House "car czar," and investment bank Lazard Ltd. to explore new lines of business.
One idea: having mail carriers—who currently deliver mail by trucks, bicycles, snowmobiles, float planes, and even by mule to a Native American tribe at the bottom of the Grand Canyon—carry monitors that could test for air quality and track weather.
The postal service should have the "flexibility to function more like a business," Rep. Elijah Cummings, (D-Md.), co-sponsor of a bill that would establish a "chief innovation officer" at the postal service, testified recently.
Still, moves to expand the postal service into the private realm have been contentious and remain controversial today.
"If the postal service turns every post office into a coffee shop and that coffee shop drives neighborhood coffee shops out of business, I don't think people would be very happy," said a senior staff member for House Oversight and Government Reform Committee.
Starting in the 1990s, forecasting a decline in first-class mail, the postal service aggressively sought out non-postal products, ranging from phone cards, to e-commerce, to a "whole range of retail products like leather jackets, mugs, t-shirts," Ruth Goldway, the chairwoman of the Postal Regulatory Commission, the federal oversight agency for the postal service, recalled in an interview.
But Congress, which ultimately oversees the postal service, worried the ventures didn't seem to make much money, had spotty financial reporting and that companies were "complaining about unfair competition," she said.
In 2006, Congress passed strict laws curtailing non-postal activities and essentially told the agency to stick with philatelic pursuits. The postal service, for instance, was allowed by law to sell Frank Sinatra CDs to promote a stamp honoring the crooner, but came under fire from regulators in 2008 for "selling a number of popular music CDs that are not obviously related to any stamp," according to a report by the Postal Regulatory Commission.
The postal service faces similar concerns now.
A Republican-sponsored postal-reform bill that passed the House Oversight and Government Reform Committee and is headed to the House floor allows for the postal service to sell advertising on postal vehicles, and to branch into public services like fishing and hunting licenses.
But "using its tax exempt and other special statuses to compete against private sector businesses in new fields would create a new set of problems that occur when a federal government agency tries to play entrepreneur," said Ali Ahmad, the spokesman for the committee.
Another key Republican, Sen. Susan Collins of Maine, was silent on the issue of non-postal products in a major reform bill she introduced earlier this year but she is now negotiating the issue with Sen. Tom Carper, (D-Del.) and Sen. Joseph Lieberman, (I-Conn.), according to a senior staffer familiar with the negotiations.
Also part of the debate in Congress: Should a government service that is required to serve everyone be expected to be profitable?
"It's unfair to apply a private-sector business model to the function of the postal service," testified Rep. Peter Welch, a Vermont Democrat. "If you're FedEx or UPS, you can pick and choose your routes…you can not deliver in rural areas if that doesn't suit your shareholder bottom line."
Quote of the Day from Dave Ramsey.com:
Wealth, like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service. — Henry Ford
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